Newsweek's Green Rankings: What They Mean ... and Don't

Newsweek's Green Rankings: What They Mean ... and Don't

Today, Newsweek releases its 2010 Green Rankings, its second annual effort to rate and rank the largest companies in the U.S. and the world. Dell and HP switched places for #1 and #2, and after that, who really cares?

The other 498 companies, that's who.

A couple weeks ago, when about 30 senior sustainability executives gathered in Milwaukee for a meeting of our GreenBiz Executive Network, I asked members how many knew their company's 2009 Newsweek Green Ranking. Damn near every one could cite it blindly. The rankings, it seems, have become a major metric in corporate America.

But it's important to put the rankings in perspective ahead of what I expect will be another surge of horserace-type analysis: who's ahead, who's behind, who's catching up, who's falling back. As these things often are, there is both more and less going on here than meets the eye.

This year's 2.0 release represented an opportunity for Newsweek and its partners to tweak the methodology from last year's maiden voyage. Not that there was a lot that needed tweaking. As I wrote a year ago, the rankings "may well be the best effort yet to rigorously and comprehensively assess the mainstream corporate marketplace."

Indeed, the basic methodology remains pretty much unchanged. Newsweek's rankings assess the 500 largest publicly held companies, determined by a combination of market cap, revenue, and number of employees. Each company gets a Green Score derived from three separate metrics:

an "Environmental Impact Score," compiled by Trucost, based on more than 700 metrics of company performance, including greenhouse-gas emissions, water use, and solid-waste disposal;

a "Green Policies Score," from MSCI's RiskMetrics Group, reflecting an analytical assessment of a company's environmental policies and initiatives; and

a "Reputation Survey Score," resulting from a survey of CEOs, corporate environmental officers, and academics conducted by CorporateRegister.com.

The first two -- Environmental Impact and Green Policies -- each account for 45% of the total score, with Reputation making up the final 10%.

So, who won? Dell edged out HP for the top spot this year, changing places from last year, when HP was #1. In fact, the top five companies -- rounded out with IBM, Johnson & Johnson, and Intel -- were exactly the same as last year, except in a slightly different order. Nike and Applied Materials kept their place among the top 10, joined this year by Sprint Nextel, Adobe Systems, and Yahoo! That last of those, Yahoo!, may have been the biggest gainer, with the Internet portal moving up 60 slots to #9, from #69 last year. Meanwhile, the #500 company of 2009, Peabody Energy, didn't budge; the world's largest private-sector coal company remained dead last in 2010.

This year, Newsweek added a second ranking, of the top 100 global companies, using the same methodology. The top 10: IBM, Hewlett-Packard, Johnson & Johnson, Sony, GlaxoSmithKline, Novartis, Deutsche Telekom, Panasonic, HSBC Holdings, and Toshiba. Some of the top companies in the U.S. ranking didn't make the list because their size didn't put them in the top 100 globally. For example, Nike and Intel, for all their heft, just weren't big enough to qualify among the world's 100 biggest companies.

As I said, all of this needs some perspective. Four key points:

The differences among the top-ranked companies are pretty minor -- and in some cases razor thin. After all, the overall rankings cram 500 companies into a 100-point scale. The top 19 companies all scored 90 or higher, and the top 87 companies scored 80 or higher. Only the bottom 5 received fewer than 30 points.

The methodology changed a bit between this year and last, so year-over-year comparisons aren't really possible. (This shouldn't be as much of a problem going forward.) No doubt, this won't stop companies from comparing closely how they and their competitors fared over the past year, but unless there were wild swings in standings, such analyses won't be meaningful.

The work that goes into some of the rankings' components is subjective, meaning that individual judgment calls are turned into numeric scores that ultimately determine a company's ranking. Given the closeness of the scores, one misinterpretation by an analyst having a bad day could make a material difference in a company's score and ranking. That subjectivity is important to keep in mind, especially given that less than 1 point separates the top four companies -- Dell, HP, IBM, and J&J.

All of the scores are relative, not absolute. That is, companies are judged not on how well they do, but on how they fare in comparison to their peers. So, Dell's top score of "100" doesn't mean it is perfect any more than HP's "100" score did last year. It just means that of the 500 companies assessed, it scored the highest.

I have no doubt that such subtleties will be lost on most people, who will view the rankings as Gospel, especially when comparing competitors -- e.g., declaring that Dell (#1) is better than HP (#2), Pepsi (#135) is better than Coca-Cola (#141), UPS (#62) is better than Fedex (#105), McDonald's (#79) is better than Wendy's (#313), Wells Fargo (#41) is better than Bank of America (#124), and Walmart (#51) is better than Target (#61). There's great sport in all this, but there can also be both unearned gloating by the winners and needless self-flagellation by the losers, especially when the differences are fairly small.

But the differences can be real -- and instructive. Consider the HP-Dell flip-flop. I asked Kathy Deveny, Newsweek's Deputy Editor, who headed up the project for the magazine, to break down what happened with those two companies.

Here's what she told me:

Dell's Environment Management System score both increased and surpassed HP's this year. Dell's Product Impact score also increased, while HP's score slightly decreased. The Product Impact component of the Green Policies Score is weighted very heavily for tech companies, giving Dell a boost.

There was no change to either Dell's or HP's Climate Change scores. However, Dell's score already was higher than HP's. The climate component is also weighted heavily for tech companies.

So, both companies did better this year than last. But Dell's Green Policies Score increased by 3 points, whereas HP's increased only by 1 point, allowing Dell to slip by HP. And the rest is history.

"It was a complicated process last year and we made it even more complicated this year," concedes Deveny, referring to the adjustments in how metrics were normalized, calculated, and weighed. There was also a harder push to get the companies to review their data before the final scores were calculated; about 40% did, roughly double last year. An analysis was added in assessing financial services companies to include the ecosystem damage of their investments.

"When you do these kinds of rankings you have a choice between doing something that's really easy to understand but kind of superficial, or doing the most comprehensive job you can and making it pretty complicated," Deveny told me. She explained that the process of comparing 500 companies across different industries wasn't easy given that they used data sets created in different units: Trucost tracks environmental impacts as dollar amounts, MSCI uses a 1-100 scale based on 70 measures of policy and initiatives, and CorporateRegister.com conducts a survey of experts.

Said Devany: "For a mass-market publication like us, it was a conundrum: Do we make it simpler, but not as good, or as comprehensive as possible but really complicated so that some people don't understand it?" She said they chose the latter path, adding, "The burden is on us to explain it." She said this year the magazine has put an expanded methodology section online.

But here's the real bottom line: There appears to be a correlation between high-scoring companies and well-performing stocks, according to Cary Krosinsky, vice president of Trucost. His analysis found that the top 100 companies in this year's Newsweek rankings outperformed the Standard & Poor's 500 Index (on an equally weighted basis) by 6.8% for the 12-month period ending September 1, 2010. That, as they say, is real money.

Correlation isn't causality, of course, but Krosinsky's findings are encouraging. It's one thing for a company to know that its sustainability measures are helping lift its stock price. But it's altogether another thing when its shareholders know that.

In the end, making that link may be the biggest contribution the Newsweek's ranking make to the field of sustainable business.